In an interview with ETMarkets, Doshi said: “One can expect special focus to boost the income opportunities at the bottom of the pyramid, rationalization of taxes, driving capex cycle (public and private) while maintaining the balance on twin deficits,” Edited excerpts:
June has been a volatile month for the Indian market, but bulls managed to keep the momentum going and pushed benchmark indices to fresh record highs. What is fueling optimism?
Market optimism is built on five core pillars of expectations – Economic growth, corporate earnings trajectory, investor sentiment, monetary policy outlook and market momentum.
These factors often interact and reinforce each other, creating a positive feedback loop that can drive market optimism. We are in a period where almost each of these has become steadily positive.While the market did react sharply to a scare of discontinuity against single-party-majority system which we witnessed for the last decade, it soon corrected upon assessing the construct of the new coalition and the structure of cabinet which clearly drives on a dominant thread of continuity in the core ministerial council and portfolios – giving market a comfort on no possible diversion from the expected policy path when it comes to economy and capital markets.
High retail interest and sufficient cash ratio in domestic institutions also has been a reason for this optimism.
We have also completed 6 months of the year 2024 – how is H22024 looking? What are the important trigger points that investors should take note of?
We are all in a world that is volatile and uncertain – be it economic, politics (elections) and conflicts (there is one new every quarter), mixed growth, stubborn supply-driven inflation and the changing dynamics on central bank responses in terms of rate policies.Add to these, the noise on AI and its rub off on business model canvass, technology life cycle and impending job losses. The two most important global events are the outcome of the US Elections and the much sought-after FED rate cut (extent and number).
Back home, the events to watch out are Union Budget 2024-25 – which would be the first from the new regime – that will set the tone of expectations, progress and dispersion of monsoon and RBI policy nuggets on following/preceding the global rate-cut cycle, if any.
One must also remain alert to a paradox where the market delivers a high single digit return in a quarter where BSE500 quarterly PAT growth (YoY) stands at 11% in March-24, the lowest since Dec-22 (5%).
Moreover, the % of companies with PAT growth
The market is breaking new records every day and retail investors are buying the dip – the one like we saw post elections. How are retail investors picking stocks? What are the trends you have seen in your fund house?
The retail investor of today is better informed, educated and even better armoured with ammunitions on how to navigate markets with a geeky framework that navigates loads of data and information.
Improved financial literacy too has played its part – and not to forget the in-built youthfulness, aggressive approach, and an aspirational mindset. Hordes of easy-access self-help material, subscription-based media, along with low-cost broking platforms are supporting decisions of these investors.
We do not operate in the retail investment space. By design we are long term, low-churn, focused equity investors – servicing the wealth needs of UHNIs.
There relationship with money is more evolved, expectations from the market are rational and they are far better informed.
How are earnings likely to pan out in the next 6 months? A recent trend suggests that prices have run up ahead of earnings upgrades.
We are in a zone where the yearly result is just out. The busy season is far away and yet to set-in. Generally, earnings expectations do not change during these periods.
One will see more serious earnings revisions post the current results season, based on the outlook and management commentary on demand, updates on key commodities, and further developments on the policy front in terms of visible government commitments to kick start new capex cycle and elevating the bottom-of-the-pyramid economic vitality.
Earnings upgrades are only one part of the equation when it comes to market performance. Liquidity and sentiments are the other two. Unless being subject to unforeseen global external events, we do not see either of them under threat with sustained retail flow commitments through DIIs, relatively lighter weightages and under-ownerships of FIIs and the recency bias of the asset class performance weighing in on the expectations in short/medium term.
What are your expectations from the Final Budget 2024?
Over the years with the formation of GST council and persistent vigil on economic progress, importance of annual budget has diminished.
On this background, The Union budget 2024-25 is significant being the first from new regime. The focus will be on taking the unfinished agenda and fast tracking some of the pending reforms.
One can expect special focus to boost the income opportunities at the bottom of the pyramid, rationalization of taxes, driving capex cycle (public and private) while maintaining the balance on twin deficits.
One can expect a special focus on sectors that can support self-dependency through import substitution and cater large domestic market.
How are FIIs looking at Indian markets?
FIIs have been a vital cog in the India story through the last 3-decades. However, the onset of a large domestic savings pool seeking superior long-term returns with committed monthly flows into the DIIs (MFs, plus insurance) have diminished their influence on the market direction in general.
For FIIs, India is one of the markets while the domestic investors are here to stay with strong stickiness. Equities continue to be a preferred asset class by savers – riding a megatrend of sustained financialization on the back of rising penetration, sustained market buoyancy, heightened retail interest, expanding base of new & early investors, and growing financial literacy.
A continued trickle of domestic flows witnessed since Covid aftermath have provided for a sustained cushion against volatile foreign flows, resulting in lower drawdowns during corrections and delivering a lower volatility.
These factors have accounted for a sustained higher multiple for India equities. FIIs flows are slaves of relative opportunity in terms of valuation multiples, growth return profiles and liquidity backed opportunities in a market.
India is an emerging market with a near-developed-market architecture in terms of its DNA of equality, legal enforcement, digital readiness, educated mass. India historically has got grouped with CHINA for comparisons and most of the time has got a second-fiddle treatment.
With the last four years performance, the tables have turned. India is now among the must-owned markets and with sustained outperformance it has only gained significance in the new investing world where incremental flows are ex-China.
One should expect them to be persistent buyers over the coming few years in India. The extent of their commitment and flows would remain enslaved to earnings growth trajectory and relative performance/valuation gap against EM peers.
FII ownership of Indian equities has been on a downward trajectory over the past 4 quarters and is at its lowest level since Sept’22. It peaked in Dec’20 at 20.7% and currently stands at 17.8%.
FII flows in SMID as a % of free-float is much higher than that of DMFs. On the contrary, DII ownership has been on a steady upward trajectory over the years and in March’24 at 14.5% is at the 2nd highest level since March’05.
In conjunction, over the last decade, retail participation has also risen considerably leading to retail ownership rising from 9.48% in June’14 to ~11% in March’24.
What about small & midcaps? Are there still stocks available at attractive valuations considering the run up we have seen in this space or does the valuation methodology have to shift now?
The attractiveness of investible space needs to be looked in terms of relative opportunities. While PERs are good starting point a deeper insight comes from the EYBY gaps and earnings growth differentials within these spaces against the market.
The pendulum is certainly swinging to the extreme in the SMID space. The excess earnings growth differential of mid-caps over large-caps declined over the last two quarters and currently stands at -34% (mid-caps – large-caps).
The same for small-caps stands at -7%. Mid-cap EYBY Gap stands at -4.6, and close to all time worst levels, as compared to the 7-year average of -3.6. Similarly, Small-caps stand at -4.1 as compared to the 7-year average of -2.6.
Any query run for finding potential opportunities finds SMID space trading at ~30%+ premium to the comparable large cap space. We think for the foreseeable near term – opportunity of outperformance is more in the large cap space than the SMIDs.
What are the themes that will be in focus in the next 6 months?
For a USD 8600 GDP per capita (at PPP level) at-inflection economy – there are multiple tailwinds playing out for India. India’s economic landscape is primed for a prolonged growth trajectory, underpinned by demographic tailwinds, digital transformation, democratic stability, and holistic development initiatives.
This nexus is accelerating megatrends spanning premiumization, fintech proliferation, market consolidation, healthcare upgrade(s), formalization, urbanization, import substitution, and manufacturing resurgence, alongside a generational capex upcycle.
For discerning investors, this paradigm shift presents compelling alpha-generation opportunities across sectors such as aspirational consumption, consumer discretionary, home improvement, BFSI, capital goods, and healthcare.
These verticals, poised to harness structural economic transitions, offer potential for sustained outperformance in long-horizon investment theses.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)